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Markets
Markets are part of the IB Syllabus in microeconomics. It is also part of the AP macroeconomics syllabus for Economic Basics. • Definition of markets with relevant local, national and international examples • Importance of price as a signal and as an incentive in terms of resource allocation A market is an assortment of institutions and, infrastructures where people trade goods and srevices which all build an economy. Examples: International: National: Local: Market Structure : ''Main article: ''Theory of the Firm • Brief descriptions of perfect competition, monopoly and oligopoly as different types of market structures, and monopolistic competition, using the characteristics of the number of buyers and sellers, type of product and barriers to entry Demand •Definition of demand • Law of demand with diagrammatic analysis • Determinants of demand: There are seven determinants of demand. #Change in income (inferior good): As income increases, the demand for inferior goods decreases. As income decreases, the demand for inferior goods increases. #Change in income (normal good): As income increases, the demand for normal goods increases. As income decreases, the demand for normal goods decreases. #Expected price of a good or service tomorrow: If the price of a good or service is expected to increase tomorrow, the demand for that good or service today increases. If the price of a good or service is expected to decrease tomorrow, the demand for that good or service today decreases. #Preference of a good or service: As the preference of a good or service increases, the demand for that good or service increases. As the preference of a good or service decreases, the demand for that good or service decreases. #Price of complement in consumption of a good or service: As the price of a complement in consumption of a good or service increases, the demand for that good or service decreases. As the price of a complement in consumption of a good or service decreases, the demand for that good or service increases. #Price of substitute in consumption of a good or service: As the price of a substitute in consumption of a good or service increases, the demand for that good or service increases. As the price of a substitute in consumption of a good or service decreases, the demand for that good or service decreases. #Population: As population increases, demand increases. As population decreases, demand decreases. • Fundamental distinction between a movement along a demand curve and a shift of the demand curve Exceptions to the Law of Demand • ostentatious (Veblen) goods • role of expectations--when people expect something to happen and then base their decisions upon their belief that that thing will happen, oftentimes their actions create the very thing they expected to happen. In short, it is a self-fulfilling prophecy, or a self-reinforcing feedback loop. *For example, if there is an expectation of future price increase--that expectation could increase present demand, leading to higher prices and an upward-sloping demand curve. *This effect can also work on goods that aren't only purchased for personal consumption, but also speculative ones, such as shares or property. **For example, the tulip mania that gripped Holland in the seventeenth century--because people expected that the tulip bulbs would be worth a great deal, they were willing to pay a great deal for them, making them in fact worth (at least for that bit of time) worth a great deal. • Giffen goods Supply • Definition of supply : The total amount of a good or service available for consumers to purchase. • Law of supply with diagrammatic analysis • Determinants of supply • Effect of taxes and subsidies on supply • Fundamental distinction between a movement along a supply curve and a shift of the supply curve Interaction of Supply and Demand • Equilibrium market clearing price and quantity • Diagrammatic analysis of changes in demand and supply to show the adjustment to a new equilibrium Price Controls • Maximum price: causes and consequences • Minimum price: causes and consequences *A minimum price is also called a price floor, and is set by the government to help prevent monopolies and externalities. *A price floor has no impact if it is set below the equilibrium point for that good, since markets automatically correct themselves and the price will just rise to eqiulibrium, as in Graph A *If a price floor is set above equilibrium, then a surplus occurs. This is because the price is too high so there will be a large quantity supplied but a smaller quantity demanded, as in Graph B. • Price support/buffer stock schemes • Commodity agreements Category:Microeconomics Category:Economic Basics (AP)